Peruvian Mining Stocks: Boom or Bust?

Can investors strike gold in South America?

In recent years, foreign direct investment has been flowing into Peru as international investors hope to strike gold -- and copper and silver. The country boasts the second-highest production of copper and silver, and sixth-highest production of gold in the world. Still, owners of Peruvian mining stocks have spent the last few years on a roller coaster ride, as share prices rose to all-time highs in 2010 and 2011 to fall sharply over the following years. With attractive prices, and positive industry developments, is 2014 the year to bet on Peruvian mining?

The playersSeveral Peruvian companies are currently listed on U.S. exchanges, including the mining company Compania de Minas Buenaventura SSA(NYSE:BVN). Other multinational companies have a large presence in the Peruvian mining industry including BHP Billiton (NYSE:BHP), Freeport-McMoRan Copper & Gold, Newmont Mining, Rio Tinto, and Southern Copper.

Buenaventurais the largest publicly traded Peruvian precious metals mining company. The company operates seven gold and silver mines in Peru. It owns over 40% of the second largest gold mine in the world, Yanacoca, along with Newmont Mining Corp. The Australian company BHP Billiton is a major player in the Peruvian copper industry, and currently has the largest number of mining permits in Peru.

Boom: A growing Peruvian economy, high gold prices, and demand from China In the past ten years, the Peruvian economy has grown over 6% per year on average, largely due to the country's mining industry, which accounted for more than 60% of its exports. According to the president of Peru, Ollanta Humala, in December mining investment could hit $14 billion in 2014.

World metal prices fell sharply during the 2008 global financial crisis but have recovered since 2011. Gold prices have been rising recently, up 9% in 2014. According to the Peruvian National Society of Mining, Petroleum and Energy the country will export $9 billion in gold in 2014.

Copper prices have been rising to particularly high levels in the past few years, fueled by high demand from China to make computers, cars, and other goods. In 2014, however, copper prices took a dive, falling 9% due to concerns over a sluggish Chinese economy. Even though the Chinese economy is likely to grow at a slower pace, there will still be significant demand for metals in the future.

Bust: labor tensions and political unrestThe Peruvian mining industry has experienced a large number of strikes, as miners have sought better working conditions and higher pay--Buenaventura just settled a strike in its largest silver mine in March. Furthermore, the strikes have not always been peaceful. In 2012, a state of emergency was declared in southern Peru after a mining protest turned violent, leaving two civilians dead.

In July 2013, major protests broke out against President Humala over poverty, income inequality, and government corruption in Peru. While the protests didn't threaten to remove Humala from office, they were the largest protests in Peru in more than a decade. Just last month, unlicensed gold miners protested in the cities of Arequipa and Lima over a 2012 law that would require them to register with the government.

Peruvian mining stocks: Fool's gold?While there is still significant political and country risk in Peru, the increasing price of gold and continued demand for metals from China, combined with the currently low prices for companies like Buenaventura, make Peruvian mining stocks poised for a comeback.